The Bangko Sentral ng Pilipinas (BSP) raising interest rates by 150 basis points more until the first quarter of 2023 to anchor inflation expectations, according to ANZ.
ANZ sees the central bank delivering back-to-back rate hikes until the overnight reverse repurchase rate hits four percent by the first quarter of next year as the evolution of inflation and inflation expectations remain key for the BSP.
“We expect back-to-back rate hikes until Q1 2023 when a terminal rate of four percent will be reached,” ANZ said In its Asia Economic Outlook Q3 2022/
The BSP jacked up its key policy rates by 50 basis points with back-to-back rate 25 basis points hikes that brought the overnight reverse repurchase rate to 2.50 percent from an all-time low of two percent.
It started its interest rate liftoff last May 19, when it delivered a 25 basis point rate hike, the first in more than three years or since November 2018, to curb rising inflationary expectations.
“The central bank’s relatively a modest hiking cycle will see real interest rates dip further into negative territory, weighing on bonds,” ANZ said.
The BSP is now expecting inflation to average five percent instead of 4.6 percent for this year and 4.2 percent instead of 3.9 percent for next year. The consumer price index (CPI) averaged 4.1 percent in the first five months of the year and exceeded the BSP’s two to four percent target as it accelerated to 5.4 percent in May from 4.9 percent in April.
“By its own assessment, headline inflation will only fall back within the official two to four percent target range by Q2 2023,” ANZ said.
On the peso, ANZ sees the local currency ending 2022 at 54 to $1 before rebounding to 53 to $1 in 2023 as near-term challenges are increasing for the peso as the Philippines faces a rising external account deficit and an aggressively hiking US Federal Reserve.
According to ANZ, domestic demand would remain high due to strong government spending program, while import growth would continue to outstrip exports and lead to a further deterioration in the external position pushing the currency lower.